10/30/2008 @ 6:00PM

Best Credit Cards For The Buck

For years, credit card offers arrived in consumers’ mailboxes with greater frequency and consistency than those AOL CD-ROMs.

The offers, many claiming pre-approval, promised low-interest rates, balance transfers and reward programs for everything from gifts to airline miles. American consumers signed up in droves. According to a June 2008 Consumer Reports story, 85% of U.S. households are signed up for at least one rewards program.

Today, however, with the credit crunch and slumping economy, low interest rates, perks and big rewards could soon be a thing of the past. Although the credit card system has, until now, been relatively insulated from the financial meltdown, cardholders are finally feeling the belt tighten.

“Credit issuers are all banks, and banks themselves are seeing their credit tighten more than ever before,” says Bill Hardekopf, chief executive of Lowcards.com, a Birmingham, Ala.-based financial information Web site. “They need to cut their risk factor by either cutting the credit limit on certain people, raising the annual percentage rate (APR) on some cards or not approving risky clients at all.”

The good news, however, is that even with the current economic crisis, plenty of credit cards still offer significant savings and perks. The rewards, however, vary significantly from card to card. So reaping the benefits isn’t simply a matter of getting any of these cards, but getting the right card.

“There are [still] lots of interesting perks available to consumers,” says Emily Peters Davidson, a credit expert for Credit.com, a San Francisco-based consumer product and financial information Web site. “But you have to make sure you’re working the system, instead of the system working you.”

From Miles to Mortgages

Credit card companies first teamed up with airlines in the mid-’80s, offering members “miles” for every dollar charged. Nearly free flights made for happy customers during boom times, but over the years, the airlines have imposed more restrictions on how and when consumers can use those miles. The value of those miles has also decreased, meaning it takes more miles to earn free tickets.

Take American Airlines. As of Oct. 1, 2008, those who use the Citi/AAdvantage Card (issued by New York-headquartered
Citibank
) will incur additional fees for upgrades on flights. Travelers flying between North America and Central America, or within North America, now pay $50 extra each way on top of the miles used. When traveling between North America and Europe, India, Asia and South America, fliers must pay a $350 non-refundable co-payment when claiming one-way upgrade awards.

And as of Jan. 1, 2009, the company is doing away with the 500-mile minimum on flights. In the past, flights under 500 miles–like from New York to Rochester–still received 500 points. Now, they’ll only receive the number of points equal to the flight’s miles.

The less attractive the airline perk got, the more consumers began looking for alternatives–and the credit card companies were ready and willing to provide them.

Kelly Tanabe, a 35-year-old wife, mother and co-owner of SuperCollege, a company that publishes how-to manuals on college prep and financial aid, has been a rewards card holder for 15 years. But she says she rarely uses a card that racks up air miles and instead prefers her Countrywide Rewards Visa, which offers a $50 cash payment for every 2,500 points she earns. That payment is directly applied to Tanabe’s Countrywide Financial mortgage. Last year, Tanabe and her husband–who use their card for both business and personal expenses–ate away approximately $2,000 in interest on their mortgage.

“We see it as double help because it’s ‘free’ money and because it saves us on interest we’d have to pay on the mortgage,” Tanabe says.

Her card also has no annual fee, no cap on the number of points she can earn per year and an introductory 0% fixed APR. Unfortunately, due to Countrywide’s merger with
Bank of America
, this specific card is no longer available to new customers. (Current customers will be able to keep the account indefinitely, with no changes to rates, according to representatives from Countrywide and Bank of America.) However, there are similar deals out there, whether you’re looking to use that bonus for something serious, like paying off a mortgage, or something frivolous, like a grande vanilla soy latte.

Wide Range of Rewards

For small-business owners like Tanabe, Davidson suggests the Advanta Customizable Platinum BusinessCard. The APR is 0% for 15 months and just 7.99% thereafter, which is minimal for a rewards card. Rewards points–one for ever dollar spent–can be redeemed for travel, gift cards or cash back.

Those attempting to save money on gas should consider the Chase BP Visa Rewards Card, which offers 5% cash back on all BP pump purchases, 2% on other travel and dining-related purchases and 1% on all other purchases. The catch, of course, is that you must use BP gas.

And even college-aged cardholders can enjoy the perks of a rewards program, according to Davidson. The Citi Dividend Platinum Select Visa–for enrolled college students only–offers 5% cash back on gas, groceries and utilities, with no annual fee and 0% APR for six months. After six months, the rate jumps to 13.49%, but that’s still lower than the 18.9% APR on most student cards.

Redemption Comes With a Price

With cash-back and gift cards galore, these points can be likened to collecting tickets in an arcade. However, unlike claiming your teddy bear after winning in skee-ball, redeeming your points doesn’t always prove to be an even exchange.

“If you pay your credit-card bill off in its entirety every month, then it is like getting free stuff,” says Hardekopf.

Unfortunately, many people don’t do that, and, as a result, they pay interest fees that cancel out any benefits of the card. What’s more, Hardekopf says, many people don’t even get the chance to redeem points because they expire in many programs. He suggests doing extensive research–both on financial information Web sites and credit card company Web sites–to make sure you understand the terms and conditions of the card, including point expiration dates.

What perks do you get on your card? Do you get bang for your buck? Share your experiences in the Reader Comments section below.

Worried that you won’t even qualify for a rewards card due to the clamp on credit? Unless you have a dismal credit rating, you should have no problem qualifying for a card, despite the current crisis, says Gail Cunningham, a spokesperson for Silver Spring, Md.-based National Foundation for Credit Counseling, a nonprofit debt management organization.

Cunningham does, however, suggest that those who currently have rewards cards review their existing contracts. Several companies–like the aforementioned American Airlines–are reducing benefits. Of course, these new restrictions have a lot to do with the struggling airline industry: Customers are also seeing higher flight prices and additional charges for items such as blankets, soft drinks and headphones.

But all in all, there is still some “free money” to be had. It just takes some research.

“A person can win at the rewards cards game if they know how to play,” says Cunningham.